Strategy

First quarter is now over and it can perhaps be best described as unexpectedly quick rebound from previous quarter. Main dividend portfolio value increased over 15% in value during the quarter. Received dividends totalled 1442,40 USD including one time extra dividend from BHP Billiton. Main problems are still in place as the trade war tensions between US and China have not been resolved and the brexit resolution was once again pushed forward. Main portfolio is currently in maintenance mode in order to deleverage while waiting for better opportunities and some kind of resolutions for the main problems in global economy. One extra ingredient in this are the local elections which might end up changing the local tax environment from quite bad to extremely bad. This remains to be seen.

I’m repeating myself but I bought additional 200 NEL shares for 4,958 NOK per share. I’m nibbling away on a slow pace for now as I’m also considering alternative hydrogen stocks to spread the risk a little bit. Having said that, I’ll most likely postpone purchases in the main dividend portfolio to see how the most significant risks for global economy will play out. Those would be mainly the trade deal deadline between China and US but also the deadline for brexit deal. Meanwhile I’ll mainly deleverage and wait for possible market corrections.

Another year has passed and it’s time to take a look at the results. Sentiment really changed towards the end of the year and we saw quite dramatic volatility. The problems however are the same old ones: Trump presidency & trade war tensions, weak EU & brexit and possibly slowing global economy. There’s no doubt that we have been closer to the end of the cycle than to the start of it. Who knows when the real turn will happen – it could be happening already or it might still be years away. Looking back at the results, it’s clear that I got what I wanted and managed to follow the strategy I’ve set to myself.

Dividend income for whole year was 5 373,07 EUR (4 450,93 EUR during FY2017)

Primary portfolio performance was -0,36% during the whole year

Debt ratio was maintained at or close to the planned 10% of the portfolio market value

What will happen in 2019 then? I don’t personally expect big changes going forward. We are likely to see even extreme volatility on index level but I don’t see strong reasons for changing the existing strategy. I will continue to buy and will aim to make at least one purchase per month for the main portfolio. For the secondary portfolio I’ll probably make one small purchase per month or one per quarter at the minimum. ETF portfolio will get a small buy each month and will be funded from the primary portfolio dividends.

I’ll keep an eye on few things: high yield companies with reasonable debt loads (as we might see mainly sideways movement for the next couple of years), quality companies with significant cash positions (which might be thrown overboard when the overall market tanks and which are in great position to deploy cash during a downturn) and advanced technologies such as brain-machine-interfacing, fuel cells & hydrogen economy. High yielding candidate could be e.g. Apple Hospitality REIT or Nordea Bank. Quality companies with significant cash positions would be the likes of Apple Inc. or Berkshire Hathaway. Advanced technologies will be much more difficult to cover. NEL is obvious candidate and it might be accompanied by PowerCell Sweden. Brain-machine-interfacing will require extensive analysis if I intend to find a suitable for addition for the secondary portfolio.

Fiscal year 2017 is coming to an end so it’s time to look at the results. This time around there were multiple significant events but none of those had massive short term effect on the market. Trump won the presidential election and first year has been interesting, tensions in the Korean peninsula escalated a bit and Catalonian independence remains unclear. Then there’s the hype like Bitcoin and cryptocurrency boom which will not end well for some of the participants I suspect. Predicting the future is always a bit difficult but I’d guess that none of these issues will truly be resolved during FY 2018. I’m also expecting Euro zone to face again the underlying problems hidden by the ECB. We might see a mild market correction but I wouldn’t expect a full recession until well into the 2020’s. My personal assumption is that ECB fails to significantly raise the interest rates before the next recession. I expect the interest rates to be below 3% when the next recession forces ECB to lower them again. Having said that, I’m also interested in reducing the debt I’m carrying as a defensive measure. That’s because I believe more in defence that I do in predictions.

In the portfolio FY2017 was quite boring. Pre-tax dividend income was 4 167,45 EUR which is a solid increase from the previous year’s 3 186,27 EUR. Adjusted and currency converted portfolio value didn’t change much as it increased merely 0,15% which clearly is a loss compared to (almost any) index. This is quite insignificant for me as this is pretty much defensive and income oriented portfolio but added margin of safety would have been nice bonus. Market valuation being in general all time high, I’ve moved the portfolio once again to a maintenance mode. Currently I plan to slowly add on Fortum and Loundspring positions while using majority of the new cash to improve the debt level. This is possible due to the secondary brokerage account I opened in Nordea Bank as they have pricing model which allows small transactions with acceptable fees. I’ll also consider selling some assets to eliminate the portfolio debt but that remains to be seen. Potential elimination list contains VEREIT (turnaround play with legal issues, original target price close to 11 USD per share), Hennes & Mauritz (sector I have mixed feelings for in general) and Nordea Bank (once there’s suitable M&A taking place).

As a risk management operation I decided to open a new account in Nordea Bank. It will complicate reporting a little bit but allows me to spread the risk in many ways. Most obvious is the protection against service downtime which could prevent me from placing buy or sell orders. Their pricing model also allows me to put the overall portfolio in a maintenance mode in which I will be making only small purchases (with reasonable fees) and use most of the new capital to pay down the portfolio debt. This also a way to put some pressure on my main broker Nordnet as they have some technical limitations that are not really acceptable, though I have to admit that they are not likely not notice this. Anyway, as the new account was opened and they had a campaign in which the stocks listed in Helsinki stock exchange could be bought without any fees, I re-initiated a position in Fortum Corporation with mere 10 shares bought at 17,73 EUR per share. I don’t expect to build a full position on the company due to the political risks mentioned before but slightly smaller position will do as there’s a lot to like in their strategy going forward.

Recent debt restructuring has left the portfolio D/E ratio way above the limit defined in my strategy. I’m aiming at 0.1 ratio during normal market conditions and calling current market normal is a stretch as well. At the moment the ratio sits at 0.154 and as we are more likely to be at or near peak of the market, ratio should really be more in the neighbourhood of 0.05 0r less. Then again central banks are making it very difficult to define market normal or abnormal. This may very well be the new normal for years to come.

After some consideration I’ve decided to move into a conditional maintenance mode. By this I mean a mode in which majority of the new capital is used to pay down portfolio debt. Conditional in that sense that should there be significant corrections in value for some of my holdings and/or companies in my watch list, I will execute planned purchases regardless the portfolio debt level. Short term execution should be quite easy as my broker still has the small purchase order campaign active which allows me to make small maintenance purchases in a cost effective way. One unknown factor is Nordea Bank AB. If they decide to move their HQ to Denmark, I might have to eventually sell my position due to taxes. In such case timing would be a bit tricky and I most likely would invest at least some of the money in Sampo in order to increase my indirect Nordea position. Some of the money could be used to pay down debt and speed up the planned debt rebalancing. There are many alternative plays here and some analysis and planning is required before proceeding with any of them.

For new positions I have some in my radar. I’ve been thinking about hydrogen sector for some months now and might initiate a position in NEL Hydrogen if the stock revisits sub 2 NOK levels. It’s a risky play and in a sense not suited for this portfolio as it doesn’t pay a dividend at the moment. Then again it could be considered as ultimate dividend growth stock if and when it starts to pay one. The sector has a lot to like. Public discussion is way too focused on standard electric cars when the actual beef is in larger scale mid-storage solutions, ships and busses and so worth. Family cars and fuel cell applications would be interesting possibility as well since the refuelling process would be similar with the current one, transportation and storage would be closer to the current method which should appeal to current big players such as NEL partner Shell. Easier taxation would be interesting factor as well as it might lead to not so market driven subsidies. There’s a lot to like in the sector even though it’s very speculative.

Recently I have been thinking about the strategy to apply during the second half of the year. There are quite a few issues making it very difficult: all time high valuations in general, EUR/USD exchange rates, political tensions, terrorism, brexit and Trump to mention few. Typically I consider such issues as a positive thing (in investment sense) as long as they produce the expected outcome which is fear and panic. A lot of that is missing though mainly due to politics on both sides of the pond but I’m pretty sure we will get there eventually. The problem is that nobody can tell when this will happen. I’m guessing that it will not happen during the second half of the year, maybe not even during 2017.

As the world lies at the moment, I’ll be considering mainly the following options for the second half: weapons, defence and security sector, alcohol and other similar substances and lastly car makers. For the weapons part I would really like to increase my position in LMT but I would like to get a bit better valuation and really don’t like the idea of converting euros to dollars with the current exchange rate. For the security part I could consider something like Securitas AB but it will require better analysis of the company details. For the alcohol part I have my eye on Olvi Plc. If the price hits my target during Q4, I most likely will open a position on it.

Car makers is a sector I have the most trouble with. I have been playing with this idea since the still ongoing VW scandal but perhaps with a bit different point of view, the overall sector valuation caused by the scandal was just a positive trigger. I’ve approached this mainly from the partially political electrification of transportation point of view. Pure electric cars is the obvious way to achieve it but personally I feel that it’s not the whole story. Some companies have been introducing fuel cell powered electric cars with moderate success but such companies are in minority and it’s easy to understand why. However, I’ll consider it to be a strategic position worth maintaining for now and here’s why: in the end it could be very much like with beta versus VHS back in the 80’s. No, not because of the porn industry but because of the infrastructure, user experience and even politics. It’s not very hard to envision the partly false appeal it would have: refuelling process would be essentially the same, less need for rare earth metals and there would still be a large job providing distribution and storage infrastructure in place which would be anyway needed for the transition period. And then there’s also the geographic factor which could make the fuel cell viable option e.g. for the northern hemisphere. True, much of this applies also for gas and even for EV recharging.

All this makes me wonder if a strategic position in fuel cell cars would be a nice to have feature in a EV capable car company waiting for technological breakthroughs in fuel cells and in battery technology. It could be a decent long term investment as long as the company can produce decent profits in current situation. In general this is a sector I don’t really like: very competitive low margin, labor intensive business with expensive unit prices. There really aren’t many companies capable to differentiate themselves expect for smaller companies like Tesla in which I will probably never invest in. They are pretty much all building relatively similar products using the same suppliers and repeating the process each year. On top of that they all depend on the overall economic situation which is somewhat dependant on the politics as well. Having said that, I’m still looking at Hyundai Motor Company for H2 with mixed feelings about the whole sector.

Brexit aftermath part 2: new position in Sampo Plc. As most stocks have traded significantly lower today, I decided to initiate a new position in Sampo. Main focus is on Nordea which dropped quite a lot today. I already have a full position on it but decided to add some exposure via Sampo. This also brings in some diversification in the form of IF insurance company and Mandatum Life subsidiaries. I bought 60 shares for 35,75 EUR per share and consider that as a decent valuation for the time being. Sampo is the type of company that rarely trades with discount anyway so I’m glad to take this valuation.

For this purchase I had to dip into my cash reserves a little bit. For the next months I really have to plan my moves. Depending on the market I have the option to increase my debt load and to spend the cash reserves even more. That would however require some once in a lifetime valuations for grade A companies. For the September I have my eye on Olvi as well so until then I just might focus on building up the cash reserves. It could be either or some kind of combination of both.

Yet another addition to existing position with a purchase of additional 50 shares of Hennes & Mauritz AB for 242 SEK per share. Lately there has been multiple reasonable valuations on existing positions and this was one of them. In fact this decreased my average price significantly. Today also Diageo went down enough to enter a really interesting value range. Lately I’ve been considering my short term strategy options. Slowly decreasing my investment debt load has been one option as it’s a bit over my intended 10% mark. Then again my cash position and debt potential allows strategic moves in the case of major meltdown on the market.

Balancing act for the portfolio as this transaction wasn’t motivated by timing. Yesterday I bought additional 65 shares of Telenor ASA for 164,50 NOK per share. Since I’ve gone a bit overweight on some assets, there’s a bit catching on to do. In the following months I should balance my position on General Electric, Coca-Cola and Vereit. Vereit is a tough one as the company has a bit problematic past which hardly justifies a full position. Then again it’s the only fully speculative position on the portfolio and in that sense fits to my current strategy. I’ll most likely build a half position on it.

I’ve also build a 10% position with external liabilities. These positions are also covered by my emergency fund which I’ve been building up lately. I would like to continue doing so for couple of months so it will be a bit problematic to come up with additional free cash for next month’s transaction. I might even skip that since this month has had plenty of extra action. It remains to be seen.